What is Home Insurance?
Home insurance is a type of property insurance that covers a private residence. Home owners pay periodic payments (called insurance premiums) to an insurance company. The company pays all or most of the costs to repair damage to the home, replace belongings in the home and other expenses that are a result of an insurable event. These could be weather related, accidents or other unexpected events. The cost of insurance varies greatly and can be affected by type, age and location of the structure.
Types of Home Insurance
The following are common types of homeowners insurance, an overview of the coverage offered and what events are protected against.
This is the most basic coverage type. This policy only covers 11 perils and includes basic liability coverage. The perils covered by an HO1 policy are:
- Wind/Hail Storm
- Vehicles (unless caused by the insured)
- Falling Objects
- Volcanic Eruption
An HO1 policy is not, in most cases, adequate to meet the minimums for a mortgage lender.
This policy, called the Broad Coverage Policy, includes detached garage and fences and also includes homeowner's liability coverage. Along with the 11 perils covered under an HO1, an HO2 policy also covers:
- Weight of Ice/Snow/Sleet
- Accidental Discharge or Overflow of Water
- Sudden & Accidental Tearing Apart/Cracking/Burning
- Sudden Damage from Electrical Current
Referred to as the Special Form Policy, is the most commonly purchased single-family home policy. This policy includes liability and covers most forms of peril, with a list of exclusions such as Earthquake and Flood. Property within the home is covered in an HO3, but only in regards to a list of specific perils, so the personal property coverage is somewhat limited.
Called the Contents Broad Form or Tenant's Form, covers personal property similar to an HO2 or HO3, with basic liability for tenants in a rental property.
The Comprehensive Form policy is considered one of the most comprehensive policies available. Like the HO3, is considered a complete protection plan with a list of exclusions. The HO5 policy also covers property within the home against everything except the listed exclusions.
The HO6, or Unit-Owner's Policy, is designed to help condo unit owners protect their personal property as well as walls, floors and ceiling against the same perils as HO2.
A very basic policy, the HO8 only covers a home against the most basic perils. It is usually used on older homes and insures at market value (or actual cash value) rather than replacement cost.
There are 5 main classifications for each of the policies' coverage. These are as follows:
Coverage A – Dwelling
This classification covers the value of the home itself. Most policies have this coverage with the exception of HO4.
Coverage B – Other Structures
This coverage includes other structures on the property such as a garage, as long as they are not used for business. Normally, this is at 10-20% of Coverage A, but additional coverages can be added for improvements.
Coverage C – Personal Property
Coverage C is for personal property. Standard 50-70% of Coverage A is required for contents. Coverage C can be issued as a cash value or replacement cost policy.
Coverage D – Loss of Use/Additional Living Expenses
This covers additional living costs if the owner needs to move out while repairs are being done as well as recuperating lost rental income if the home is fully or partially rented out.
This is a catch-all category for other coverages such as fire department charges, damage to trees, debris removal, etc.
How Is The Cost Determined?
The cost of home insurance depends on the type and classification, the deductible as well as other details.
The deductible is the amount of money that an insurance holder pays out of pocket before the insurance company kicks in with its payment on a claim. This number is important because the deductible comes out of the policy holder's pocket. An insurance policy with a low deductible will generally have lower premiums, while a higher deductible policy will have lower premiums.
It's best to compare both options and consider how much money you'd have available to use in the event of a claim before choosing your policy.
Other factors include the following:
Home Value – The single biggest factor guiding the insurance rates is the value of the home. This is the overall amount of risk that the insurance company takes on.
Size of the Home – Larger homes come with larger risks. In the event of a fire or other disaster, there is more possible damage in a large home. Typically, larger homes have more value, as well.
Type of Construction – How flammable is the home or how storm resistant? Materials like brick and stone typically are cheaper to insure than wood. The safer the home's construction is, the less the insurance will cost.
Age and Condition – Older homes typically come with more risks including older wiring, furnaces and lack of security features.
Location – Is the home in a hurricane zone? How close is the nearest fire station? Is it in an area where vandalism or burglaries are frequent? The insurance company takes all of these factors into consideration.
Credit Score – Credit scores count as a factor on home insurance. A good credit score shows responsibility and makes the insurance company more likely to consider the candidate to be a low risk homeowner. Low risk means lower rates.
How Much Insurance Is Enough?
"An investment in knowledge pays the best interest." – Benjamin Franklin
With all of the home insurance options available, it can be difficult to know just how much insurance is enough without paying for more than you really need.
The Value of the Home
If a fire or natural disaster were to demolish the home, it's important to have enough coverage to rebuild without having to downsize. Consider what risks are inherent with the location of the home and add on extra insurance like flood or hurricane if needed.
The safety of visitors to a home lies with the homeowner. Should someone fall on an ice patch or trip on a loose board, the homeowner can be held accountable for any medical bills and damages that come about as a result. Having adequate liability coverage is essential.
Your Personal Possessions
Of course it's impossible to put a price on sentimental items, but speaking in terms of dollar value, it is important to have enough insurance to be able to replace at least the majority of your possessions if disaster were to strike.
Additional Living Expenses During Repairs
If a home is damaged or destroyed, the homeowner will need to find somewhere to live while repairs are made. Not everyone has relatives close by to help out in these situations. Costs for a hotel or apartment can add up in a hurry.
Can You Own a Home Without Home Insurance?
Legally, yes, it is possible to own a home without home insurance coverage. That is, only if the homeowner owns the home in full. If there is a bank mortgage on the home, the bank will require a certain level of coverage to protect its investment. How much coverage could vary according to the bank and the specifics of the home itself.
A Brief History of Home Insurance
Home insurance as its own product did not exist in the United States until September 1950. Homeowners were able to protect their homes before that date by buying separate policies for each possible peril such as fire or wind. Changes in insurance laws allowed for the packaged home insurance concept to become legal and The Insurance Company of North America was the first to advertise a homeowners policy that would protect against fire, theft, lightning, wind, explosion, hail, riot, vehicle, damage, vandalism and smoke. The single policy was less expensive than carrying multiple policies to cover each possible peril.
Home Insurance Regulation
The United States does not have a federal agency to regulate Home Insurance. Each state monitors and regulates the insurance companies doing business within its borders. States ensure that the company is financially viable, can pay claims as necessary, handles business in a legal manner, and charges reasonable premiums.
The Claims Process
When an insured home is damaged, call for police, fire department or ambulance assistance if needed first. It is best to minimize the damage if it is possible. Keeping receipts for any money spent during this time is advisable, as they can be submitted as a part of the claim. From the police to the insurance company or contractor, keeping track of the names, numbers, and conversations can keep the process moving smoothly. Taking pictures of the damage is also a good way to keep records.
Once the call is made to the insurance company, they will send an insurance adjuster who will assess the amount of the damage. It is best for the homeowner to be present when the adjuster is there so they can make sure everything of significance is duly noted. The homeowner is entitled to copies of every document along the way and shouldn't sign any waivers until completely satisfied with the payout from the insurance company.
If the insurance company and the homeowner are not in agreement as to the amount of the damage, a public adjuster can be used as a third-party assessor of the damage. The homeowner is responsible for the cost of the public adjuster, but may recoup far more in insurance benefits as a result.
Source – Consumer Reports